Eastern Europe's Growth Hinges on Euro Zone: EBRD

Reported by Geoff Cutmore, Written by Antonia Oprita|CNBC.com

Thursday, 26 Jan 2012 | 5:37 AM ETCNBC.com

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Growth in Central and Eastern Europe hinges on developments in the euro zone and a slowdown in the CEE region is already underway, European Bank for Reconstruction and Development (EBRD) chief economist Erik Berglof told CNBC on Wednesday.

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Budapest, Hungary

The countries in the region export heavily to the euro zone and investment, trade and remittances – money sent by workers abroad – depend on the single currency area's health, Berglof said in an interview at the World Economic Forum in Davos.

"The closer you are to the euro zone, the more the impact will be," he said.

"I think there are reasons to hope that the scenario will not be as bad as in 2008-2009 but clearly growth rates are coming down," Berglof continued.

"The most serious issue right now is the impact of what's going on in the banking sector, because the capitalization measures in the Western European banks have very significant impact on Eastern Europe," he said.

"The foreign banks, when they are under pressure, they tend to contract, to go home to their home base and leaving their subsidiaries not supported enough."

Western banks present in the region – including Austrian Erste Bank and Raiffeisen, Italian UniCredit and French Societe Generale who have heavily invested in Central and Eastern Europe – have promised again to keep funds in their subsidiaries, after making the same pledge during the first wave of the recession, back in 2009.

Hungary is the weakest country in the region, mostly because of its political situation, but it looks like the country will manage to reach a compromise with the European Union and the International Monetary Fund (IMF) for a loan to help it finance itself, Berglof said.

"Hungary is a red flag, we have to watch very carefully what's happening in Hungary but it's a little bit different from the other countries," he explained.

"It came into the crisis in a much worse state than the other countries. It has, since the new government came in place, taken a number of measures that have undermined the confidence particularly in the financial sector but also more generally."

Hungary's government has outraged foreign investors since taking power in 2010 by measures such as nationalizing some private pensions, fixing the exchange rate for some of the foreign exchange loans taken by Hungarians during the boom and trying to curtail central bank independence.

But the right-wing government recently announced it was ready to discuss its position on the central bank legislation, with officials saying they hoped an agreement with the EU and the IMF could be reached by March or April.

"I think there we are on the right track; Hungary will have to go to the IMF and the EU to get some kind of arrangement to help them out on their current trouble and I think on that front we are already on the right path," the EBRD's chief economist said.

Berglof said Poland was the strongest country in the region, just like in the past crisis.

"I think Poland did very well in the first leg of the crisis… Poland is, I think, in the entire Europe, a source of hope," he said.